"We expect the stock and bond market reaction to the Fed announcement to be initially negative as investors see yesterday’s action by the Fed as the first move in their strategy to normalize interest rates," said Fred Dickson of DA Davidson & Co.

The Fed announced after the market\’s closing bell Thursday that it was raising the rate on emergency loans to banks, known as the discount rate, by a quarter point to 0.75 percent, effective Friday.

In a statement, the Fed said its action was part of changes to terms of its so-called discount window lending programs "in light of continued improvement in financial market conditions."

Some analysts pointed out that the move only surprised in terms of timing, noting that Fed chairman Ben Bernanke had already signaled that it was coming earlier in the month.

"The timing of the move is understandably stunning, but that does not mean it should have been considered surprising," said Patrick O\’Hare at Briefing.com.

Investors also sifted through Labor Department data on January consumer prices showing they inched up a less than expected 0.2 percent amid the sluggish recovery from recession.

So-called "core" consumer prices — excluding food and energy — fell 0.1 percent in the first decline in 27 years.

The market pullback came after stocks rallied for a third day Thursday despite a mixed batch of economic data and disappointing earnings guidance and soft sales from retail giant Wal-Mart.